Monetary policy frameworks in EMEs: practice ahead of theoryClaudio BorioHead of the Monetary and Economic Department 89th Annual General Meeting

2

One question, three takeaways

Why combine IT with FX intervention and macroprudential measures?

Three takeaways

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help

3

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help

4

EMEs adopt inflation targeting but not free floating Inflation targeting regimes rise... …but so do FX reserves Use of macroprudential tools

0.0

0.6

1.2

1.8

2.4

02 04 06 08 10 12 14 16 18

//

USD trn

0

5

10

15

20

02 04 06 08 10 12 14 16 18

Inflation targeting EMEsInflation targeting AEs

# of measures

0

20

40

60

80

01 03 05 07 09 11 13 15 17

%

Inflation targetingFX anchor

EMEs: Other

5

Inflation, growth and credit in inflation targeting economiesInflation Real GDP growth Real credit growth

–2

0

2

4

6

8

10

01 03 05 07 09 11 13 15 17 19

%

–7.5

–5.0

–2.5

0.0

2.5

5.0

7.5

01 03 05 07 09 11 13 15 17 19

%

EMEs AEs

–8

–4

0

4

8

12

16

02 04 06 08 10 12 14 16 18

%

6

EMEs face large exchange rate and capital flow swings

–40

–20

0

20

–200

–100

0

100

00 02 04 06 08 10 12 14 16 18

% USD trn

Real exchange rate, EMEs (lhs) Net capital inflows to EMEs (rhs)

7

Exchange rate pass-through is higher in EMEs

–0.3

0.0

0.3

0.6

02 04 06 08 10 12 14 16 18

% pts

EMEs

AEs

8

Financial markets are not as developed in EMEs as in advanced economies

0

150

300

450

ID TR RU IN MX BR CL KR ZA AU CA GB

% of GDP

EMEs

Size of institutional investors Trading in FX derivatives

0

10

20

30

ZAR

HU

FCZ

KTR

YM

XN PLN

CLP

THB

KRW

BRL

RUB

COP

PHP

PEN

INR

IDR

NZD

AUD

GBP SE

KN

OK

CAD

% of GDP

AEs

9

Roadmap

EMEs are more sensitive to capital flows and exchange rates Currency mismatches The financial channel of the exchange rate

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help

10

Foreign currency debt and foreign ownership raise vulnerabilities in EMEsForeign currency debt Foreign ownership in EME local sovereign bond

markets

0

8

16

24

06 08 10 12 14 16 18

% of total

EMEs Asian EMEs Other EMEs

5

10

15

20

0.0

0.6

1.2

1.8

06 07 08 09 10 11 12 13 14 15 16 17 18

% of GDP USD trn

EMEsBy borrower (lhs):

Asian EMEsOther EMEs

USDCHF/EUR/GBP/JPY

By currency (rhs):

11

The self-reinforcing currency mismatch loop

Appreciation

financial conditionsLoosen

Capital inflows

Depreciation

financial conditionsTighten

Capital outflows

12

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs Stabilising inflation and output at the same time

FX intervention and macroprudential measures can help

13

In EMEs, exchange rate appreciation goes hand in hand with……lower bond yields… …and stronger domestic credit expansion

–0.10

–0.08

–0.06

–0.04

–0.02

0 5 10 15 20 25 30 35 40 45 50

% pts

Spread Risk premium

Days

–0.2

0.0

0.2

0.4

0.6

0 6 12 24 30 36

%

Domestic creditMonths

14

First monetary policy dilemma

15

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs Stabilising inflation and output at the same time Stabilising the economy today vs stabilising it tomorrow

FX intervention and macroprudential measures can help

16

Behaviour of selected variables around crisesCountry group medians, in standard deviations

Advanced economies EMEs

–2

–1

0

1

–16 –12 –8 –4 0 4 8 12

Domestic financial cycle Capital inflows (debt)

–2

–1

0

1

–16 –12 –8 –4 0 4 8 12

Real effective exchange rate

17

Second monetary policy dilemma

18

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help

19

FX intervention mutes the financial channel of the exchange rateFX intervention leans against appreciation, offsetting capital inflows…

....and dampens credit expansion, offsetting the same flows

–0.3

–0.2

–0.1

0.0

0.1

0.2

% pts of GDPImpact on credit growth

Capital flows

–0.3

–0.2

–0.1

0.0

0.1

0.2

Impact on the exchange rate %

FX intervention

20

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help But FX intervention is no panacea

21

Roadmap

EMEs are more sensitive to capital flows and exchange rates

This worsens two potential monetary policy trade-offs

FX intervention and macroprudential measures can help But FX intervention is no panacea Need for a macro-financial stability framework

22

Thank you!